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Italy Caps Tumultuous Year With First Recession Since 2013

(Bloomberg) -- Italy fell into recession at the end of 2018, capping a year of political turmoil, higher borrowing costs and fiscal tensions that took their toll on the economy.

Output shrank 0.2 percent in the three months through December, following a 0.1 percent decline in the previous quarter, statistics agency Istat said Thursday. That was more than expected, and will put further pressure on the coalition government, which already appears to be fraying.

The contraction was anticipated, particularly after Premier Giuseppe Conte said Wednesday that he expected the fourth-quarter GDP drop. Separate figures showed the euro-zone economy grew 0.2 percent at the end of 2018, matching the pace of the previous quarter, but slower than the first half.

Market reaction to confirmation of the Italian recession was limited. The spread between Italian 10-year bond yields and those of similarly dated German bunds stayed at 240 basis points. The country’s benchmark FTSE MIB index erased earlier gains and was down 0.4 percent.

The euro was little changed against the dollar at $1.1477 as of 11:43 a.m. in Rome.

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Investors have been warily watching Italy’s economic performance following months of negotiations with the European Union over the government’s budget that pushed up bond yields. While the recession may prove short-lived, the latest bad news is likely to test market confidence in the government’s expansive program for 2019.

“The growth forecasts on which the budget was based have already been blown out of the water and euro-zone growth continues to weaken,” said James Athey, a portfolio manager at Aberdeen Standard Investments in London. “Italy is going to have to face up to some real problems.”

Italy’s fourth-quarter figure was worse than the 0.1 percent median forecast contraction. Istat blamed in part a “marked worsening” in industry, and said services’ activity stagnated. The economy expanded 0.1 percent from the same quarter of 2017.

Leaders of the current populist government, which took office on June 1, have been blaming their predecessors for the economic morass. Deputy Premier Luigi Di Maio said in a Facebook post that the Democratic Party-led previous governments “lied to us, never brought us out of the crisis.” Pier Carlo Padoan, who served as finance minister in the previous two administrations, pushed back, calling the barrage of negative comments “disgraceful and ignorant.”

Both the Bank of Italy and the International Monetary Fund project 0.6 percent growth in Italy this year, less than half the forecast pace of the 19-nation euro zone.

‘What Our Economists Say’

“The decline was likely due to the uncertainty created by the budget battle between Brussels and Rome. However, the slump has probably already come to an end and spending growth should resume this quarter.”

David Powell, Bloomberg Economics. Read the full REACT

Rome and Brussels agreed on a revised spending plan following the tensions between the two sides. That included a smaller 2019 deficit target, while Rome has kept a lower retirement age for some workers and income support for the poor.

The Italian numbers come amid increased pressures on the euro area due to the global slowdown. The German government says its economy will expand just 1 percent in 2019, the slowest pace in six years.